The economy of Panama is a fully dollarized [8] economy with a history of low inflation. It is based mainly on the services industry, heavily weighted toward banking, commerce, and tourism.

Panama's economy is based primarily on a services sector that accounts for nearly 80% of its GDP. Services include the Panama Canal, banking, the Colón Free Trade Zone, insurance, container ports, and flagship registry, medical and health, and other business. The country's industry includes, manufacturing of aircraft spare parts, cements, drinks, adhesives, and textiles. Also some exports for Panama are bananas, shrimp, sugar, coffee, and clothing.

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Since the early 16th century, Panama's geographic location has given the country a comparative advantage. Soon after the Spanish arrived, the conquistadors would transport gold and silver from Peru to Spain via the Panama isthmus. Ports on each coast and a trail between them handled much of Spain's colonial trade from which the inhabitants of the port cities prospered. The country has always been dependent on world commerce for its prosperity and imports. Agriculture received little attention until the 20th century, and by the 1980s had for most of the population barely developed beyond indigenous Indian techniques. Industry developed slowly because the flow of goods from Europe and later from North America created a disincentive for local production.[9]

Panama has been affected by the cyclical nature of international trade. The economy stagnated in the 18th century as colonial exchange via the isthmus declined. In the mid-19th century, Panama's economy boomed as a result of increased cargo and passengers associated with the California gold rush. A railroad across the isthmus, completed in 1855, prolonged economic growth for about fifteen years until completion of the first transcontinental railroad in the United States led to a decline of trans-isthmian traffic. France's efforts to construct a canal across the isthmus in the 1880s and efforts by the United States in the early 20th century stimulated the Panamanian economy.[9] In 1903 Panama separated from Colombia and the United States took control of the Panama Canal Zone; soon afterwards a constitutional ruling adopted the US dollar as legal tender for the country.[10]

The United States completed the canal in 1914[11], and canal traffic expanded by an average of 15% a year between 1915 and 1930. The stimulus was strongly felt in Panama City and Colón, the terminal cities of the canal. However, the world depression of the 1930s reduced international trade and canal traffic, causing extensive unemployment in the terminal cities and generating a flow of workers to subsistence farming. During World War II, canal traffic did not increase, but the economy boomed as the convoy system and the presence of United States forces, sent to defend the canal, increased foreign spending in the canal cities. The end of the war was followed by an economic depression and another movement of unemployed people into agriculture. The government initiated a modest public works program, instituted price supports for major crops, and increased protection for selected agricultural and industrial products.[9]

The postwar depression gave way to rapid economic expansion between 1950 and 1970, when GDP increased by an average of 6.4% a year, one of the highest sustained growth rates in the world. All sectors contributed to the growth. Agricultural output rose, boosted by greater fishing activities (especially shrimp), the development of high-value fruit and vegetable production, and the rapid growth of banana exports after disease-resistant trees were planted. Commerce evolved into a relatively sophisticated wholesale and retail system. Banking, tourism, and the export of services to the Canal Zone grew rapidly. Most importantly, an increase in world trade provided a major stimulus to use of the canal and to the economy.[9]

In the 1970s and 1980s, Panama's growth fluctuated with the vagaries of the world economy. After 1973, economic expansion slowed considerably as the result of a number of international and domestic factors. Real GDP growth averaged 3.5% a year between 1973 and 1979. In the early 1980s, the economy rebounded with GDP growth rates of 15.4% in 1980, 4.2% in 1981, and 5.6% in 1982. The acute recession in Latin America after 1982, however, wreaked havoc on Panama's economy. GDP growth in 1983 was a mere 0.4%; in 1984 it was -0.4%.[9]

This period coincided with the rise to power of General Manuel Noriega during which Panama became increasingly indebted, by 1986 owing SDR284m (US$360m) to the IMF alone, 278% of their quota.[12] This led to the IMF imposing an adjustment program supported by an IMF stand-by arrangement in 1985–87[12] whilst the economy recovered somewhat. In 1985 Panama experienced economic recovery with 4.1% GDP growth. The corresponding figure for 1986 was estimated to be 2.8%.[9]

The United States started to pursue Noriega for fostering a narco-state in Panama, culminating in sanctions that froze Panama's assets in the United States; since Panama used the US dollar it was forced to default on its IMF debt on 28 December 1987.[12] Economic turmoil in the country included a general strike and the banking system closing down for two months.[12] Panama made a token payment the day before the IMF meeting in November 1988, but the situation did not resolve until 1989.[12] Presidential elections in May 1989 were condemned by the international community as fraudulent and the IMF began to become impatient with Panama's increasing arrears which had now reached SDR121m (US$150m).[12]

The United States and Germany forced through a resolution on 30 June 1989 declaring Panama ineligible for further support from the IMF.[12] The situation was eventually resolved by the US invasion of Panama in December 1989 which forced the surrender of Noriega.[12] SDR181.5m (~$US230m) was still owed to the IMF in April 1990; the country regained access to IMF funds on 2 May 1992.[13]

A proportional representation of Panama's exports.

After taking office in 1994 President Ernesto Perez Balladares set forth an economic liberalization program designed to liberalize the trade regime, attract foreign investment, privatize state-owned enterprises, institute fiscal discipline and privatize its two ports in 1997 and approve the sale of the railroad in early assets. Panama joined the World Trade Organization (WTO) and a banking reform law was approved by the legislature in early 1998 and dismantled the Central bank. After two years of near stagnation the reforms began to take root; GDP grew by 3.6% in 1997 and grew by more than 6% in 1998. The most important sectors which drove growth were the Panama Canal and the shipping and port activities of the Colón Free Trade Zone which also rebounded from a slow year in 1996.

On September 1, 1999, Mireya Moscoso, the widow of former President Arnulfo Arias Madrid, took office. During her administration, Moscoso attempted to strengthen social programs, especially for child and youth development, protection, and general welfare. Moscoso's administration successfully handled the Panama Canal transfer and was effective in the administration of the Canal.

The PRD's Martin Torrijos won the presidency and a legislative majority in the National Assembly in 2004. Under Torrijos, Panama continued strong economic growth and initiated the Panama Canal expansion project that began in 2007 and was opened to commercial traffic on 26 June 2016, at a cost of US$5.25 billion - about 25% of current GDP.[14] The canal expansion doubled the waterway capacity, enabling it to accommodate Post-Panamax ships that were too large to transverse the transoceanic crossway,[14] and expected to help to reduce the high unemployment rate. Strong economic performance had reduced the national poverty level to 29% in 2008.

In 2008, Panama had the second most unequal income distribution in Latin America. The Torrijos government implemented tax reforms, as well as social security reforms, and backed regional trade agreements and development of tourism. Not a CAFTA signatory, Panama in December 2006 independently negotiated a free trade agreement with the US, which, when implemented, should help promote the country's economic growth.

In May 2009, Ricardo Martinelli elected president, and on July 1 promised to promote free trade, establish a Panama City metro system at an approximate cost of $1.0 billion,[15] reform the health care system, and complete the expansion plan for the Panama Canal. Martinelli also emphasized the importance of transforming Panama into a “safer, modern and supportive” nation devoted to improving the living conditions of its population through efficient and accountable governance.

Panama has a substantial financial services sector and no central bank to act as a lender of last resort to rescue banks that get in trouble. As a result, Panamanian banks are very conservatively run, with an average capital adequacy ratio of 15.6% in 2012, nearly double the legal minimum.[16] The sector grew up providing trade finance for trade passing through the Canal, and later evolved into money laundering for the drug trade under Noriega. Since the global financial crisis of 2007–08 the country has been trying to shake off its reputation as a tax haven, signing double taxation treaties with many (mostly OECD) countries and in April 2011 a treaty on the exchange of financial information with the United States.[16]

Panama is a net food importer and the United States is its main supplier.[18] Agriculture employs a large number of Panamanians (in relation to agriculture's percentage of Panamanian GDP) with many farmers being engaged in subsistence farming.

Taxation in Panama, which is governed by the Fiscal Code, is on a territorial basis; this is to say, that taxes apply only to income or gains derived through business carried on in Panama itself.[19] The existence of a sales or administration office in Panama, or the re-invoicing of external transactions at a profit, does not of itself give rise to taxation if the underlying transactions take place outside Panama. Dividends paid out of such earnings are free of taxation.

In February 2005, Panama’s unicameral legislature approved a major fiscal reform package in order to raise revenues from new business taxes, and increases the country’s level of debt. The legislature voted 46 to 28 in favour of the measures, which include a new 1.4% tax on companies’ gross revenues, and a 1% levy on firms operating in the Colon Free Trade Zone – the largest free port in the Americas.

PresidentRicardo Martinelli had promised to implement a flat tax system with a flat tax of 10% and which promised to raise revenues, put inflation under control and which will allow enormous real wage gains.[citation needed] Instead the Martinelli government increased sales tax to 7% from 5%, as well as increasing other taxes, in order to finance many infrastructure projects around the country.

Panama's roads, traffic and transportation systems are generally safe, with older traffic lights having undergone a recent overhaul and most have been replaced by traffic lights that are capable of being controlled [and changed] remotely, even at busy intersections where they are not needed. Driving during the midday is usually slow and demanding due to dense traffic, frequent traffic jams, and street renovation programs. On roads where poor lighting and driving conditions prevail, night driving is difficult and in many cases, restricted by local authorities, this usually occurs in informal settlements. Night driving is particularly hazardous in these areas.[20] Traffic in Panama moves on the right, and Panamanian law requires that drivers and passengers wear seat belts.[20]

Currently, Panama used to have an extensive and efficient, yet confusing to tourists, form of public transportation consisting of colorful painted buses colloquially known as diablo rojo. A diablo rojo is usually "customized" or painted with bright colors, usually depicting famous actors, politicians or singers. It is now popular all over the city (and also in neighboring towns) for bus drivers to personally customize the interior and exterior of their diablo rojo. Panama City's streets experience frequent traffic jams due to poor planning.

"Diablos Rojos" are not in Panama transportation since 2010. Metrobus and the Metro are the current transportation.

The following table shows the main economic indicators in 1980–2017.[21]

Year

1980

1985

1990

1995

2000

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

GDP in $(PPP)

7.32 Bln.

11.18 Bln.

12.61 Bln.

18.59 Bln.

26.47 Bln.

36.71 Bln.

41.07 Bln.

47.27 Bln.

52.36 Bln.

53.61 Bln.

57.38 Bln.

65.48 Bln.

72.85 Bln.

78.93 Bln.

85.20 Bln.

91.10 Bln.

98.87 Bln.

103.89 Bln.

GDP per capita in $(PPP)

3,693

5,024

5,097

6,767

8,704

10,956

12,032

13,600

14,799

14,890

16,104

17,585

19,234

20,498

21,772

22,917

23,995

25,351

GDP growth(real)

4.5 %

11.2 %

8.1 %

1.8 %

2.7 %

7.2 %

8.5 %

12.1 %

8.6 %

1.6 %

5.8 %

11.8 %

9.1 %

6.6 %

6.0 %

5.8 %

5.0 %

5.4 %

Inflation(in Percent)

13.8 %

1.0 %

0.8 %

0.9 %

1.4 %

2.9 %

2.5 %

4.2 %

3.8 %

2.4 %

3.5 %

5.9 %

5.7 %

4.0 %

2.6 %

0.1 %

0.7 %

0.9 %

Government debt(Percentage of GDP)

...

...

...

81 %

56 %

62 %

8 %

48 %

41 %

40 %

39 %

38 %

34 %

34 %

36 %

37 %

37 %

38 %

Nominal GDP per capita in Panama was (in balboas or US dollars) 11,691 in 2002, 13,099 in 2004, 14,004 in 2005 (Prelim), 15,141.9 in 2006 (est), as reported by Office of Statistics and Census, Government of Panama.[22] Growth from 2002 to 2006 was especially strong in the transport and communications sector, which became the biggest component of GDP, although many sectors also saw strong growth. Real GDP rose 7.5% (03-04), 6.9% (04-05), 8.1% (05-06).[23]

GDP growth in 2008 was 9.2%, reflecting a slowing of the robust growth of 11.5% seen in 2007. Although growth slowed to 2.4% in the first half of 2009, due to the global economic downturn, it is expected to improve in 2010 and is still one of the most positive growth rates in the region. Growth has been fueled by the construction sector, transportation, port and Panama Canal-related activities, and tourism. As a result of this growth, government deficit as a percentage of GDP dropped to 43% in 2009, and government-issued debt achieved investment grade in February 2010.[24] A recent United Nations report highlighted progress in poverty reduction from 2001 to 2007—overall poverty fell from 37% to 29%, and extreme poverty fell from 19% to 12%. However, Panama still has the second-most unequal income distribution in Latin America.[25]